The formula for the standard deviation of cash held by the centralized depository for N affiliates is $\sqrt { ( \text { Std. Dev. Affiliate } 1 ) ^ { 2 } + ( \text { Std. Dev. Affiliate } 2 ) ^ { 2 } + \cdots + ( \text { Std. Dev. Affiliate } N ) ^ { 2 } + }$

Question

Quizplus · Accepted Answer

The formula assumes that inter-affiliate cash flows have a correlation coefficient of 0, meaning that there is no correlation between the cash flows of the affiliates. Therefore, the standard deviation of the cash held by the centralized depository is simply the square root of the sum of the variances of the cash held by each affiliate.

The Formula for the Standard Deviation of Cash Held by the Centralized